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RUSSIA’S BANKING SYSTEM BUILDS UP DEFENSES

BUSINESS MIR, Business mir #22 - 2012-08 MAIL PRINT 
The lower house of Russia’s parliament, the State Duma, is to consider the bill for banning foreign lenders to open their branches in the country.
In case the bill is adopted, foreign banks which are already playing on the Russian market will be able to continue their operations for the next three years only. After that, in line with the plan of the authors of this legislative initiative, they would be obliged to re-register banks’ charters according to the rules of the Russian banking system.
Experts say that the bill does not contain any legislative innovations and is only fixing the legal status quo already existing in the Russian banking system, because foreign lenders had no opportunity to operate on the Russian market trough their branches. They could become market players and obtain a license only through their Russian subsidiaries and by entering the charter capital of local lenders.
Besides, the fact is that previously the law provided for setting up foreign banks’ branches in Russia, but the Central Bank’s Credit Institutions Licensing & Financial Rehabilitation Department had no designed and developed procedure of the process. So the question arises: how efficient and timely is this legislative initiative? As even without such a law one can easily see the trend on reduction of the foreign bank’s presence on the Russian market allegedly due to high maintenance costs of their local offices.
Experts say that currently the Russian banking system loses to foreign lenders’ Russian subsidiaries on the interbank lending market. In theory, foreign subsidiaries could raise funds through their parent companies under low interest rates and to offer their products in Russia at more advantageous conditions. But experts believe that if foreign banks actually had the opportunity to open their branches in Russia, it will result in complete disintegration of the national banking system. The Russian lenders are not only inferior in their development to foreign counterparts, but, for various reasons, lack such competitive advantages as an easy access to cheap foreign-currency borrowings.
It is no accident that the explanatory note of the Russian Finance Ministry reads that if the establishment of foreign banks’ branches in Russia has been allowed, it would give them a number of certain advantages. For example, unlike the Russian banks, they would have no need to make allocations to the reserve funds, send RAS and IFRS calculated operation and financial results to the Central Bank. Such "privileges" given to foreign lender’s branches can easily reduce the competitiveness of Russian banks.
Practice shows that this is indeed the case. For example, let us envisage the issue of business loan procedure through the foreign bank’s branch. If the borrower wants to receive the loan directly through the branch of a foreign bank, then, despite the regulation of its activities by Russia’s laws, the branch is actively carrying out its own policies in the banking sector. It is prepared to give loans with a maturity period of up to seven years and at the same time opens credit lines both to medium and small business.
Such a loan obliges the borrower to undertake a number of commitments to ensure his solvency. For example, he is prohibited from selling his assets, have debts, exceeding a certain amount, etc.
At the same time, many Russian banks are better adapted for operations under local conditions, they and their clients speak one language in the literal and figurative sense. But they do not guarantee confidentiality. Information that is stored in Russia is easily available to regulators upon request.
Now, if the new law is adopted, foreign banks’ branches will be deprived of the opportunity to establish credit and deposit rates according to the regulations of their home countries. At the same time, the Russian banking system should be more active in implementation of new innovative products and does not rely only on its ability to actively lobby the federal government and the State Duma.
BUSINESS MIR, Business mir #22 - 2012-08  MAIL PRINT 
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